DO STATIONARY RISK PREMIA EXPLAIN IT ALL - EVIDENCE FROM THE TERM STRUCTURE

Predictable variations in excess returns have often been attributed to the presence of time-varying risk premia. In this paper, we use an in sight based upon new techniques from time series analysis to test whet her stationary risk premia can alone explain the behavior of excess re turns to long bonds relative to rolling over short rates. Surprisingly , we reject this hypothesis using U.S. T-bill returns. We then show th at either permanent shocks to the risk premia and/or rationally antici pated shifts in the interest rate process could produce anomalous resu lts.